Past paper

Question 1

Explain ways in which having access to financial information could benefit them

Answer 1

Accounting is often described as collecting, analysing and communicating financial information with the purpose of assisting users to make decisions

A number of approached could be taken, with the two main ones being as follows:

Planning
When making plans for future activity, historic information will be useful as it provides a sense of ‘where we have been’. This will provide a starting point for formulating plans.

Decision making
Often, the planning process will lead to a number of different potential suggestions. Good quality financial information will allow the impact of each possible suggestion to be assessed, allowing a more informed approach to decision making.

Assessing performance 
By communicating the performance of the business, accounting information allows an assessment of the performance of the business to be assessed.   

Control
Comparing actual performance to budgets allows owners and managers to assess whether expected outcomes have been, or are expected to be, achieved. This can allow corrective action to be taken, if necessary.

Another approach is to focus on specific outcomes, such as:

Allowing tax liability to be agreed with the tax authorities

Assisting in agreeing loan facilities – whether with traditional lenders (such as banks) or providers of working capital finance (such as trade credit)

Providing information which could assist in calculating a fair price for the business in the event of sale to a new owner.

Question 2

(b) Identify 6 users of financial statements and explain their information needs;

Answer 2

Owners To assess if wealth has been maximised, or is growing at a satisfactory rate

Managers			To choose between alternative courses of action, and 
				To assess the outcome of decisions.

Lenders			To decide whether the business has the capacity to repay the loan.

Suppliers			To decide whether to grant credit to the business

Employees			To provide information to support claims for more pay or resources 

Customers To assess if the company is likely to remain in existence, thus guaranteeing supply

Question 3

Explain all 7 of the following key principles of financial accounting:
Historical cost 
Money measurement 
Business entity 
Dual aspect 
Time interval 
Accruals 
Going concern

Answer 3

Historical Cost Assets and liabilities are recorded at their cost at the time of the original transaction
Money measurement only items which have a monetary value are recorded

 Business entity 		the business is separate from the owner       or
			Transaction are recorded from the perspective of the business

 Dual aspect 			every transaction impacts on the entity in two ways

 Time interval 		financial statements are prepared for a specified time period

Accruals income is recognised at the time goods are sold and expenses are recognised when they are incurred, not when cash changes hands

Going concern	unless there is evidence to the contrary, it is assumed that the business will continue in existence for the foreseeable future

Question 4

Explain the purpose of each of the following financial statements:

Statement of profit or loss/Income Statement.

Statement of financial position/Balance Sheet.

Answer 4

The income statement shows the total revenue generated during a particular period and deducts from this the total expenses incurred in generating that revenue. The difference between the total revenue and total expenses will represent either a profit (if revenue exceeds expenses) or loss (if expenses exceed revenue).
The income statement is concerned with the creation of wealth over a period of time.

The statement of financial position shows the financial position of a business at a specific moment in time, reporting assets, liabilities and capital at the date on which the accounting period ended.
It shows the wealth of the business at the date on which the accounting period ended.